Performance Based Contract (PBC)

A: According to the PBC model used by the Australian Department of Defence, PBC is defined as an outcomes-oriented contracting method that ties a range of monetary and non-monetary CONSEQUENCES to the contractors based on their accomplishment of measurable and achievable PERFORMANCE requirements.

Whereby, PERFORMANCE constitutes of:

One or more outcomes that if delivered reflects overall contract success;

Each outcome is measured by one or more performance measures;

Each performance measure includes:

What levels of performance are considered unsatisfactory, satisfactory and superior; and

the Contracting Agency (Government) receives assured consistent performance of the Contractor, and as measured by the Key Performance Indicators (KPIs), Strategic Performance Measures (SPMs) and System Health Indicators (SHIs) in a Value for Money manner; and

the Contractor receives appropriate monetary and non-monetary rewards commensurate with their commercial risk.

A: The current Government maintenance contracts related to the through life support of assets (inclusive of moveable and non-moveable assets) are mostly transactional of prescriptive-based whereby payment to the contractor is determined based on “process” i.e. man hours and materials consumed to perform the work when it is required (reactive approach). The conventional contracting approach has not been able to achieve the desired performance level set by various Government agencies due to unreliability usage of assets and does not drive the right behavior in aligning with the Government’s outcomes in terms of better performance and cost optimization.

A: A PBC is about buying the level of Performance required by the Government to deliver the capability it requires at the right time, to the right configuration and at a fair price to ensure successful completion of each task/mission. To do this PBCs:

are centered on the outcome of the work to be performed;

pay for results (outcome), not just efforts (man hours and spares); and

payment can be modify based on contractor’s achieved performance.

There are 5 main characteristics of a PBC:

Requirements are focused on the contractual outcomes and not how the work is performed;

Set of indicators are tied to the outcome;

Achievable performance standard for each indicator;

Defined process to collect, analyse and report data for the selected indicator; and

Range of monetary and non-monetary consequences, either rewards or sanctions for the contractor, based on achieved performance.

Most importantly, a PBC can be used to shape the right behaviour of the contractor and potential to promote long term partnership between Government and contractors through reward and incentive such as extension of contract tenure.

A: Based on the experience in other nations, successful PBCs have proven its benefit in improved performance by assuring consistent Availability and Operational Capability of complex Government’s asset or system and realising better Value for Money to the Government than conventional contracts by delivering:

improved assets’ (equipment) reliability thus achieving the full potential of Government investment; and

reduced contract price by making the Maintenance, Repair & Overhaul (MRO) and other industries more transparent and regulated.

Based on recommendations made by The Center to Combat Corruption and Cronyism (C4’s) in their public report on “Procurement as Part of Good Governance in New Malaysia – Challenges and Recommendations” published in August 2018 (the 1st Web Edition), PBC application has a huge potential as the viable solution in the Government procurements. This can be achieved by securing the best deal in terms of cost and required services through open tender while avoiding unnecessary leakages/wastages and lastly, performance of contractors can be collected, monitor periodically and kept for decision making process.

A: While there are many benefits to using PBC, it is important to realise that they do have some limitations. Basically, PBC is not:

a solution for a poorly defined requirement and/or basis of payment;

a solution for a poor relationship between the Contracting Agency and Contractor; and

the approach for fixing poor contract.

Note: This are general rules of thumb and there are examples of highly successful PBCs that are used in these circumstances. For further information, please contact PBC Center of Reference (PBC CoR) TDA.

A: While there are many benefits to using PBC, it is important to realise that they should not be used in all circumstances. PBC is not appropriate to be used:

for short duration contracts where there is limited opportunity to measure contractor’s performance;

where there is a limited desire to use this approach because PBC requires an ongoing daily management, hence, commitment of both parties is critical; and

newly acquired or fielded systems that have not yet achieved a level of maturity/design stability to support predictable parts forecast and/or estimates of maintenance activities. Early transfer of the performance risk to a commercial provider may result in a higher cost to the Government.

Note: These are general rules of thumb and there are examples of highly successful PBCs that are used in these circumstances. For further information, please contact PBC Center of Reference (PBC CoR) TDA.

A: PBCs has been the best practice for many nations worldwide for maintenance outsourcing contracting approach on both defense and non-defense sectors, including Australia, USA, United Kingdom, Canada, New Zealand, Singapore and Malaysia.

PBCs are also used extensively in the Private Sector with major capital investments, large scale maintenance and production facilities and various level of Government applying the principles of PBC in their contracts.

In Malaysia, the current focus is in the Capability Sustainment within the Maintenance, Repair and Overhaul (MRO) for aerospace industry involving Government MRO contracts in Defense/Security and Government Agencies. There is also a huge potential that PBC arrangement being introduced on non-moveable assets (Aset Tak Alih) within the Facility Management such as roads/highways, buildings, incineration plants, healthcare facilities and the likes.